Just as the TSX looks like it can exceed recent highs, we see a notable reversal day. In this case, a good open near the highs of the day and a close at the low of the day reversing most of the previous day’s advance. Recall the bulk of Tuesday’s advance happened during the holiday Monday, so Tuesday’s gains in the TSX were mostly playing catch up. So like we have seen for the past few months, the TSX probably drifts back towards the trend of recent rising lows. Nothing to worry about in the grand scheme at this point, just more trading noise.

The most notable reversal was in the overbought energy sector. Our view is WTI has no business being at $95 when supply and demand fundamentals point to $85 as a reasonable average price given subpar growth for the next few years coupled with increasing domestic supply. The insurers are reporting sloppy earnings and banks are not going to be any better. The TSX remains stuck in the mud for a while.

The S&P TSX should play a little catch up today and it is clear that the price action in the past few months has been confusing to say the very least. We expect more choppy markets in the coming months with crude oil leading to most of the choppiness, and gold adding to that theme as well. In the next few months, we are sellers above 12,000 and buyers below 11,400 and see little scope for a strong move beyond either side of that range.

Nat gas stocks remain the relatively cheapest part of the TSX and make some sense for investors to accumulate on weakness in the coming months. We do not see a robust recovery for a while, but the longer-term risk reward is compelling in the sector. The fact that they have not moved much and nat gas has bounced from the $2 area, suggests that the market does not believe just yet.

The FOMC did exactly what we and many others suspected they would do yesterday—nothing! Washington did exactly what we thought they would do yesterday—waste time and money. Congress went through the motions to pass an extension of the “Bush” tax cuts so that when they are out politicking for votes in the coming months, they can blame the Democrats for not supporting the Bill.

The market should be somewhat disappointed that the ECB did not confirm or detail the bond buying plan. However, it had little response to the rate announcement and is waiting for the press conference, and perhaps Friday’s NFP report. A weak close Friday with 2/3rds of earnings in the bag (read the good news side) will turn the focus back to the global macro risks, which as all will know is a #()%!#$ mess. Aggressive traders can be short at the end of the weak if we close below 1375, a close above 1395 suggests a retest of the May highs.

A quick comment on yesterday’s mini “flash crash” caused by Knight Trading—expect more of the same as even more computers trade with computers.

If historical patterns repeat, and we know they do, gold equities are likely to be disappointed for a few days following the FOMC not adding more QE today. Although most economists surveyed think they will add more QE at some point, the Bernanke has clearly stated that they want to see things get a bit worse before they act.

World oil process weakened again yesterday as WTI struggles to hold above $90 while the XEG put in a notable bearish reversal pattern, perhaps capping the near-term upside for the TSX. If gold and energy look weaker, it is hard for the TSX overall to do much on the upside.

So commodities are bouncing a bit based on the expectation the ECB is about to launch a major QE effort to reduce borrowing costs in Spain and Italy. Gold has responded by breaking out above a 4 month trendline of lower highs and should be able to test the upper resistance in the $1655 to $1690 range. The 200-day average is at $1655, but it is not seen as an important level. The 50% retracement from the Feb high to the May low is at $1659 with $1690 the 61.8% retracement. The declining trendline of the 2011 and 2012 highs projects into the $1680 area today and is declining at about $1 per day.

Gold stocks continue to see significant earnings impairments from exponentially rising costs, so if gold cannot make a material move above this overhead resistance, gold stocks are unlikely to do much better than a retest of nearby resistance areas either. NEM missed big today just like ABX did yesterday. However, seasonals are bullish for the sector for the next few months, so a buy dips bias makes sense.

As speculation mounts over another few trillion of debt purchases globally, the gold seasonal trade may have its day in the sun. We doubt the Fed has any more information next week than they did last meeting or in Bernanke’s recent testimonies to suggest the Fed moves next week. To be sure, they “stand ready,” but we already know that. If the Fed rolls the dice now and it does not work (because is can’t), then next year when the US fiscal cliff presents itself and the Clowns in Washington cannot get their act together again, just a dab won’t do ya. So they need to save the bazooka for the cliff.

All the metrics that Bernanke has mentioned as a trigger, namely inflation expectations as measured by breakeven spreads between inflation indexed bonds and nominal bonds, is still North of 2% and not anywhere near previous trigger points—though heading in that direction. Anyone looking for it next week is likely to be disappointed. That rush of post announcement selling might be the next best buying opportunity for the TSX and gold stocks.

The TSX tried to pull off a reversal day after dipping below the 200-day on a bounce back in energy and financials. The TSX is clearly exhibiting bottoming behaviour, but the outlook as we see it is still unlikely to generate much more than another bounce while the risks of a lower low and retest of the 2011 lows is growing, as the US market stumbles and European banks head for new lows as well.

The fact that the energy sector cannot generate a material rally despite the potential for M&A and the recent $15 rally in WTI speaks volumes about the underlying confidence in the market. It does also suggest that people are underinvested in cyclicals and that when the catalyst is a good one, the markets can put in a good rally.

Promise of more QE if needed from the Fed is not enough for the precious metals at this point, but the seasonals are now positive, so a bottom is likely near. We could see one more head fake to the downside before an explosive rally.

The bond markets of the world are telling us all is not well. Very few investors understand the magnitude of the deleveraging that is needed combined with the loss of confidence in the fiat currency system. While quantitative easing (basically printing money to buy outstanding bonds) is more politically palatable than the austerity being forced on Europe’s peripheral economies, it ultimately undermines confidence and is not sustainable.

As Stephanie Pomboy articulated very well in Barron’s this week; it probably ends with the world going back to some sort of gold backed system. This probably takes years to play out and it will not be until governments hit bottom and all bullets in the Fed’s arsenal are used that this eventuality plays out. In the mean time, nothing short of strong economic growth un-aided by governments will normalize the bond markets.

The trading cycle for the TSX remains positive, which means traders should be in a buy dips mode. However, the relative cycle confirms that the TSX is still one of the weaker markets in the world. All will know that for the TSX to perform well it needs energy, golds, and base metals to perform well. Over the past few months, these stocks have been decimated.

There is little doubt that the TSX is quite oversold relative to other markets in the world, but in the very short run, it continues to lack a material bullish catalyst. Even the recent strength in WTI crude oil bouncing from $78 to $89, and nat gas from a dip below $2 to coming close to $3, has not managed to excite investors. Seasonals for gold stocks turn up for the next six months, which should help significantly, but there is little clarity in energy where the fundamentals remain soft at best.

The earnings pre-announcements are clearly having an impact on the S&P 500′s investor psychology. The developing dominating chart patterns at this point, nearly three and one half years into a stimulus induced “economic recovery” with very little natural momentum, suggest that the cycle is failing and that recession is a growing risk. Odds are increasing that with the fiscal cliff overhanging the Presidential elections, while we could see a more traditional rally into the election, the flip side of the trade could be increasingly volatile on the downside.

For now, a dip below the 200-day average is likely the next best buying opportunity and we have our powder pretty dry for that. It seems increasingly unlikely that we see sustainable new highs with the global economy slowing so rapidly. True, we are seeing stimulus measures, but increasingly they are having a muted impact.